Popular Practices: Why Writing Off Bad Debt is Bad for Your Business

April 11, 2018

There is no worse feeling for a business owner than having an unpaid receivable and realizing that the debtor does not intend on paying you. You have provided this person or organization with products and/or services, and a lot of your hard work, and you may very well not get paid for it.

When this happens, many businesses are tempted to write off the debt for tax purposes. But this is a bad idea, and it is bad for a number of different reasons.

First of all, when you write off a debt, it is gone for good. You can’t decide a month from now to try to collect it again. Just as importantly, writing off a bad debt can have a dramatic effect on your profit margin. For example, if your business is operating on 4% profit margin and you write off a $20,000 debt, you will need an addition $500,000 in sales to make up for the loss, if you want to maintain your profit margin.

Before you write off a debt, consider one of the following alternatives:

Be Persistent

When you write off a debt, you have let the debtor win. This person or organization has received something for free without consequence. Instead of giving up, be more persistent. Make more phone calls, send more letters. Never let the debtor forget that it owes you money. Eventually, they might pay just to get rid of you.

Hire a Collection Agency

If you are uncomfortable about being persistent (or lack the time), you can hire a collection agency to be persistent for you. They are essentially professional naggers. Yes, they will take a sizable cut of what they collect, but you will still receive something in the end. What’s more, you can then write off their fee.

Take the Debtor to Small Claims Court

Depending on the size of the debt and the laws in your jurisdiction, you might be able to take the debtor to small claims court. Some states allow you to sue in small claims court for sums of up to $25,000. Furthermore, suing in small claims court is a relatively easy and hassle-free process, and you do not need a lawyer.

Hire a Collection Lawyer

If the debt is significant, you should definitely consider hiring a commercial litigation lawyer. They are well trained at successfully collecting bad debt. Many good attorneys will even provide their services contingent upon success. This means that they only get paid when you get paid, and — like with a collection agency — their fee can be written off as a business expense. Sometimes all they have to do is send a letter. Often just the threat of a lawsuit — and all the hassles that come with it — is sufficient motivation for a debtor to pay up.

In conclusion, do not be so quick to write off that unpaid debt. It represents your sweat and tears, and you earned it. Does it not make sense to try every impossible means of collecting the debt before giving up on it?